Can you Afford that Condo? Introducing the Debt Ratios
May 9th, 2009
Banks use the Debt Service Ratio to assess your creditworthiness.
Defined as the monthly loan installment amount divided by your gross monthly income, your DSR typically has to be somewhere in the 35% to 40% region for banks to be happy to grant you that mortgage. (See also past article on second home loan.)
However, the DSR ratio doesn’t say if you’re taking up excessive loans.
You may have a low overall DSR, but due to low interest rates and long mortgage tenors, you may be piling up too much loans. Or maybe your income has just gone up (how nice) , but with savings still remaining low, your DSR may look deceptively good.
It is even possible to have negative net worth with good-looking DSR. Banks don’t care, but I hope you do.
To be safer, you should also look at your Debt to Net Worth ratio.
This is similar to the Debt Equity Ratio used by financial analysts to assess companies. Small companies with 60% D/E are deemed to be ok.
I would keep my Debt to Net Worth ratio at 50% or lower.
Calculating your Debt to Net Worth ratio is straightforward: Total up your outstanding loans, and divide the sum by your net worth (see how to calculate your net worth).
For example, if your outstanding loans sum up to $500k and your net worth is $1 million, your Debt to Net Worth ratio would be 50%.
What is your Debt to Net Worth ratio?
Can you Afford that Condo? Introducing the Debt Ratios - Salary.sg Forums Says:
August 3rd, 2009 at 5:25 pm
[...] Can you Afford that Condo? Introducing the Debt Ratios Banks use the Debt Service Ratio to assess your creditworthiness. Defined as the monthly loan installment amount divided by your gross monthly income, your DSR typically has to be somewhere in the 35% to 40% region for banks to be happy to grant you that mortgage. (See also past article on second home loan.) However, the DSR ratio doesn’t say if you’re taking up excessive loans. You may have a low overall DSR, but due to low interest rates and long mortgage tenors, you may be piling up too much loans. Or maybe your income has just gone up (how nice) , but with savings still remaining low, your DSR may look deceptively good. It is even possible to have negative net worth with good-looking DSR. Banks don’t care, but I hope you do. To be safer, you should also look at your Debt to Net Worth ratio. This is similar to the Debt Equity Ratio used by financial analysts to assess companies. Small companies with 60% D/E are deemed to be ok. I would keep my Debt to Net Worth ratio at 50% or lower. Calculating your Debt to Net Worth ratio is straightforward: Total up your outstanding loans, and divide the sum by your net worth (see how to calculate your net worth). For example, if your outstanding loans sum up to $500k and your net worth is $1 million, your Debt to Net Worth ratio would be 50%. What is your Debt to Net Worth ratio? http://www.salary.sg/2009/can-you-a... [...]
Is Your Home Price 7.6 Times Your Household Income? | Salary.sg - Your Salary in Singapore Says:
September 24th, 2009 at 11:41 pm
[...] family will be paying $44,460 a year to service the loan, making its debt-to-service ratio a hefty 75%, which is way beyond the standard recommendation of [...]
RR Says:
September 25th, 2009 at 10:19 pm
About your advice keeping the Debt to Net Worth Ratio below 50%:
Let’s assume a person has no property and wishes to buy one that is worth $500k. He takes a 30-year loan for $400k at say 4% interest. And assume that before he buys the property, he is debt free. Right after buying the property, his debt would be more than $400k. If he were to keep his Debt to Net Worth ratio below 50%, then his net worth would have to be at least $800k (I don’t know what is the more accurate figure since I did not calculate the interest payments on the loan; perhaps you can provide). For someone who wants to always keep his Debt to Equity Ratio at around 50% and who wants to buy a resale flat now, he would need to have assets of around $600k or more. So is your advice still relevant for those who are planning to buy their first property?
heavy debt Says:
September 25th, 2009 at 10:43 pm
as you said, you’ll need substantial networth. unfortunately in this day and age, high debt is the order of the day. if one’s young, it’s almost impossible to even keep one’s debt below one’s worth, much less have assets 3 times of liabilities (to get that debt/nw=50%). as such, i disagree with maintaining too little debt, as one will lose out on enjoying a nice home and potential capital appreciation in times of high asset inflation like now.
Does Your Income Match Your Housing Type? | Salary.sg - Your Salary in Singapore Says:
December 5th, 2009 at 11:42 pm
[...] in private housing. There are various ways to find the answer. You can ask a bank, calculate your debt ratios, use our 7.6x guideline, or compare your income with the average income of your desired housing [...]
Does your salary match your housing/vehicle spend? | Career and Job search Insights - Sandbox Advisors Singapore Says:
December 15th, 2009 at 10:31 am
[...] in private housing. There are various ways to find the answer. You can ask a bank, calculate your debt ratios, use our 7.6x guideline, or compare your income with the average income of your desired housing [...]
Singapore Job Market News › Does your salary match your housing/vehicle spend? Says:
December 16th, 2009 at 8:37 am
[...] in private housing. There are various ways to find the answer. You can ask a bank, calculate your debt ratios, use our 7.6x guideline, or compare your income with the average income of your desired housing [...]